Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Weak Hands

What it is:

In futures trading, weak hands are investors who do not intend to take delivery of the underlying asset. In currency trading, weak hands are investors who tend to follow traditional trading rules, thus making their trading predictable. 

How it works (Example):

Futures contracts give the buyer an obligation to purchase an asset (and the seller an obligation to sell an asset) at a set price at a future point in time. 

Food production companies are likely to take delivery of the corn, wheat or other underlying commodity when they trade futures contracts. They are strong hands.

Speculators, however, are weak hands -- they essentially place bets on the future price of commodities. They don't want to take possession of the corn, wheat, etc. 

Why it Matters:

Weak hands are placing bets rather than investing. They tend to be easily spooked by price changes, and they often tend to buy at the peak and sell at the trough. In both the futures and currency markets, weak hands are often blamed for big price swings, but they also provide liquidity to these markets. 

Unpredictable price swings and the ability to trade on margin make futures trading and currency trading high-risk propositions. It takes a tremendous amount of skill, knowledge and risk tolerance. Investors who can identify when weak hands are in the market have a better chance of predicting the nature and degree of price changes.